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Perspectives Podcast

Welcome to the B|O|S Perspectives Podcast - a new podcast featuring the latest content from Bingham, Osborn & Scarborough.


12.  Inflation: The Dog That Hasn’t Barked

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In a crisis, desperate times often call for desperate measures. As acknowledgment to lessons learned from the Great Depression of the 1930s, federal institutions have embraced economic and monetary stimuli, low interest rates, and free(ish) trade policies to keep the economic wheels turning. But the price tag has been hefty. In a matter of weeks, trillions of dollars were printed — some physically, most electronically — which is on the heels of $4+ trillion created during the 2008–2009 financial crisis just a decade ago. With so many more U.S. dollars in circulation, should investors worry about inflation — a decline in the value of money?

Show Notes:

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today’s episode addresses the question: with so many U.S. dollars in circulation, should investors worry about inflation – a decline in the value of money? and was written by B|O|S Principal, Aaron Waxman.

The Paycheck Protection Program, the Money Market Mutual Fund Liquidity Facility, the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility, the Term Asset-Backed Securities Loan Facility, the Main Street Lending Program, the Municipal Liquidity Facility, the Commercial Paper Funding Facility, and the Primary Dealer Credit Facility. Collectively, these programs represent about $6 trillion of new money created through joint efforts between the U.S. Treasury and U.S. Federal Reserve to help mitigate the economic and market implications of COVID-19.

In a crisis, desperate times often call for desperate measures. As acknowledgment to lessons learned from the Great Depression of the 1930s, federal institutions have embraced economic and monetary stimuli, low interest rates, and free(ish) trade policies to keep the economic wheels turning. But the price tag has been hefty. In a matter of weeks, trillions of dollars were printed — some physically, most electronically — which is on the heels of $4+ trillion created during the 2008–2009 financial crisis just a decade ago. With so many more U.S. dollars in circulation, should investors worry about inflation — a decline in the value of money?

In the short run, probably not. Mass isolation, quarantine, and unemployment severely cripple spending because incomes fall and activities are restricted. Showering the economy with freshly minted money doesn’t incrementally add to pre-crisis levels of spending, it only partially offsets the decline in total spending as a result of the crisis. Checks in the mail from Uncle Sam help pay for groceries and rent, not new furniture in the living room. Clothing, cars, and airline tickets go on sale because demand falls faster than supply. Trillions of dollars are infused into the economic ecosystem and the price of crude oil still falls 60 plus percent. Each U.S. dollar on hand buys as much or more than it did pre-crisis, not less.

Over the long run, though, investors would be wise to keep a close eye on inflation. The world’s governments have printed an incredible amount of fiat currency and created enormous sums of debt in a very short period of time. The charts in the show notes illustrate total worldwide debt and that debt within major countries, measured as a percentage of gross domestic product since the turn of the century. Notably, the charts only include data through 2019. The impact of COVID-19 on the debt trajectory is yet to come — and it will surely be significant.

Looking to the bond market for clues, we are plainly led to believe that there is little inflation in sight. The 10-year breakeven inflation rate, represented by the yield on a 10-year U.S. Treasury bond with no inflation protection as compared to the yield on a 10-year U.S. Treasury bond that adjusts for the rate of inflation in the U.S. economy, that is a so-called Treasury inflation-protected security, currently hovers around 1%. In short, bond investors are collectively betting that inflation will average 1% per year over the next decade.

We will only know, of course, after the virus has passed and economic activity returns to some new normal. The proverbial canary in the coal mine may be the debt-to-GDP ratio. If the economy is able to bounce back and expand faster than new debt is created, the global heap of debt may be manageable as total debt as a percentage of GDP declines. However, if debt growth continues to rapidly outpace GDP growth in a lasting fight against economic malaise, at some point, investors may begin to question the credit worthiness of major issuers and demand higher interest rates as compensation for higher perceived risks of repayment. To fight against such a dynamic, the Fed, as it is doing now, may print more and more money to buy more and more debt to keep interest rates down, creating a loop in which fewer bankruptcies and higher employment in the short run, via low interest rates, leads to too much money creation — thus spiking inflation.

The Fed and central banks around the world are attuned to this risk, of course; and on balance, we should have some level of confidence that they will collectively navigate things successfully. Having said that, the stakes are enormous and we are sailing in uncharted waters. Mistakes can happen, which may justify portfolio modifications to help hedge against the higher inflation, a risk the broader market doesn’t seem to expect.

Effective hedges may be value stocks, gold, real estate investment trusts, and Treasury inflation-protected bond securities that pay an interest, or “coupon”, rate equal to Consumer Price Index. Value stocks tend to fare better than growth company stocks because they are typically defined as companies with low price-to-book ratios. The “book” in the denominator represents book value, or assets on the company’s balance sheet, which tend to move up and down in value in a manner commensurate with local inflation. Real estate investment trusts work the same way as the underlying trust assets are physical properties. Gold is a more obvious inflation hedge, but it can also be a more expensive one, as gold has no yield or profit stream. There are, of course, other potential hedges beyond these examples.

As ever, long-term investors should maintain a balanced, diversified approach with at least some embedded defenses to help navigate all weather in all seasons. When markets mold around a consensus view, surprises can be costly.

I’m David Newson and you’ve been listening to B|OS Perspectives podcast. If you enjoyed today’s episode please subscribe with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

11.  Hope Springs Eternal

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In light of the pandemic, no one is embracing the stock market’s daily gyrations with particular confidence. Nevertheless, the seemingly surprising gains during the month of April, in which the U.S. stock market, as measured by the S&P 500, rose by more than 12%, provided some reassurance to investors. Yes, with 33 million Americans out of work, entirely at odds with the radically more optimistic expectations of just a few months prior, the stock market turned in its best month since 1987.1 The market is still down by modest double digit amounts for the year, but as of this writing losses in the U.S. were closer to 10% than the ~30% range investors were absorbing little more than 6 weeks ago.

Show notes:

 

1. MarketWatch, May 4, 2020. https://www.marketwatch.com/story/the-stock-markets-rallying-while-the-economys-tanking-it-all-makes-perfect-sense-2020-05-02

2. Wall Street Journal, April Jobs Report, May 3, 2020. https://www.wsj.com/articles/april-jobs-report-likely-to-show-highest-unemployment-rate-on-record-11588514401

3. IRS website. https://www.irs.gov/statistics/soi-tax-stats-irs-data-book

4. Jeffrey Gundlach, Twitter, May 4, 2020. https://twitter.com/TruthGundlach/status/1257487779958648834

5. Markets Insider, May 4, 2020. https://markets.businessinsider.com/news/stocks/disposable-income-likely-grow-amid-virus-shutdown-goldman-sachs-forecast-2020-5-1029162249

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today’s episode examines the various steps the Federal Reserve and Congress have been taking to address COVID-19’s effect on the markets and US economy. Today’s episode was written by B|O|S Principal Jeff Lancaster.

In light of the pandemic, no one is embracing the stock market’s daily gyrations with particular confidence. Nevertheless, the seemingly surprising gains during the month of April, in which the U.S. stock market, as measured by the S&P 500, rose by more than 12%, provided some reassurance to investors. Yes, with 33 million Americans out of work, entirely at odds with the radically more optimistic expectations of just a few months prior, the stock market turned in its best month since 1987.1 The market is still down by modest double-digit amounts for the year, but as of this recording, losses in the U.S. were closer to 10% than the ~30% range investors were absorbing little more than six weeks ago.

A good part of the gain was linked to increasing confidence about the ability to flatten the curve of COVID-19 in the short run, yet plenty of fuel remained for those investors still inclined to fear the worst. To pick a single example, expectations about future corporate profits grew ever more pessimistic, as illustrated in the chart contained in the show notes.

Given the dismal news on the front page of every last newspaper, staying in the stock market in late March and throughout April took tremendous discipline and fortitude. April’s excellent returns bring to mind the aphorism, attributed to many, that a good part of successful long-term investing requires one to “don’t just do something, stand there.”

A 12-Month Perspective

Investors often cherry-pick the worst possible time period to measure portfolio losses, but for those of a more optimistic bent, it is useful to note that from the end of April 2019 to the end of April 2020 the S&P 500 actually recorded a slightly positive return. This seems so incongruous as to beggar belief. Given that the U.S. unemployment rate as recently as February was at a half-century low of 3.5% yet is now said to be above 20%,2 what supports the stock prices of so many, but certainly not all, of the companies with suddenly unemployed workers? As of this recording, things change quickly, the recovery in stock prices seems to be traceable to three major factors: increasing confidence that growth in COVID-19 cases can be mitigated, awareness that the Federal Reserve will do whatever it believes necessary to secure the financial system, and, finally, congressional authorization of trillions of dollars for businesses and workers alongside clear signals that if these trillions aren’t enough, there’s more where that came from.

We will leave the virus-related epidemiology aside and consider the steps taken by the Fed and the Congress.

The Fed is frustrating because while everyone knows it is awesomely powerful, few sensible, educated people really understand its workings. The metaphysical complexity has arguably worsened in the past few months, as there are now no fewer than nine lending programs in place, each one, seemingly, with its own mysterious acronym. Some of these programs are new creations while others are older projects recently expanded, but in any case, these facilities provide an aggregate $2.3 trillion in loans. Some of this money is and will be doled out in partnership with the U.S. Treasury. The historically novel and broader Fed goal is to insulate not only businesses and their balance sheets but also to extend credit to state and local governments.

In addition, the Fed lowered the cost of borrowing by dropping interest rates close to zero. Importantly, the Fed has made it crystal clear that rates will stay very close to zero until after the economy recovers and robust employment is restored.

Last but not least, the Fed has created money out of thin air and has used that money to purchase securities issued by the Department of the Treasury to finance deficit spending. Between March 16 and April 16, the Fed bought nearly $80 billion of securities a day. Other Fed funds will be used to buy debts issued by corporate and municipal borrowers. All told, the Fed’s balance sheet, the bonds owned by the central bank, may soon total $11 trillion, roughly twice the size of the Fed’s balance sheet during the 2007-2009 financial crisis.

The Fed’s aggressive moves have been largely cheered but some details have been the subject of controversy. In particular, the Fed’s intention to create an affiliated entity to backstop the market for publicly traded junk debt has raised eyebrows. Junk is just one step above equity on a business’s capital structure, and if the Fed has said it will buy junk, some wonder if it will go the route of the Central Bank of Japan and start buying stocks should market conditions once again deteriorate. In any case, just as owners of debt securities are reassured to know that the Fed is buying what they own, all else being equal, owners of stocks might well be cheered to know that the Fed might step in to support prices of what they own, too.

Congress has been busy, too, spending money at unprecedented rates via no less than four economic stimulus packages since March. The most notable features of these packages include unemployment benefits, expanded lending to small businesses, and stimulus checks sent directly to American households. As recently as January of this year, the Congressional Budget Office forecast a $1 trillion deficit, but the federal deficit this year is now projected to be $3.7 trillion and the actual figure will likely prove higher than $4 trillion. To get a sense as to how large a $4 trillion deficit is, consider that in fiscal year 2018 the IRS collected $3.5 tillion in gross taxes.3 This equation prompted influential bond manager Jeffrey Gundlach to ask on his Twitter feed, “If endless borrowing is a viable solution, why did we have any taxation in the first place?”4 Less cynically, Goldman Sachs economist Jan Hatzius measures the fiscal response as so lavish that Americans’ “disposable personal income is likely to register slightly positive growth for this year.”5

In the Balance

Slowing infection rates, an aggressive and inventive Fed, and a free-spending Congress all worked together in April to push U.S. stock prices significantly higher. As ever, stock prices reflect the equilibrium judgments of highly informed market participants, and so we can imagine that for every dollar thinking these same forces will continue to propel the market higher, another dollar is wagered in the belief, commonly heard, that the market needs to fall further to more accurately reflect diminished expectations for future corporate profits. With uncertainty high on many fronts though, it is reasonable to assume that the equilibrium judgments of investors will continue to fluctuate substantially as new developments in the battle with the coronavirus and new updates on the economy provide additional insights into what the future will look like.

If you enjoyed today’s episode please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

10.  B|O|S Flash Briefing: Week of May 11, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, May 20th, 2020 and today’s flash briefing for the week of May 11th was written by B|O|S Director of Research Jeffrey Blanchard.

U.S. stocks rallied sharply on Monday, May 18th, propelled by news of positive results from an early-stage trial of a potential COVID-19 vaccine. A U.S. company named Moderna Inc. announced that an experimental vaccine induced immune responses in healthy humans. This is an early milestone in a long road to a potential vaccine, but gave the market confidence that a vaccine would be forthcoming at some point in the future. The S&P 500 Index rallied approximately 3% on the news wiping out the losses from last week, which was the worst performing week since the market lows in late March.

Most of the losses from last week occurred on Tuesday and Wednesday. Dr. Anthony Fauci testified before a Senate Committee on Tuesday and said the virus is not under control and warned that reopening the country too soon could have serious consequences. Stocks fell further on Wednesday after Jerome Powell, the Chairman of the Federal Reserve, spoke at a virtual conference. During that meeting Mr. Powell said the Fed was unlikely to lower the Fed Funds rate below zero. He also implied that more support needs to come from government spending and not monetary policy. The market responded negatively to these comments as the markets had been pricing in the possibility of negative rates by early next year. The comments were also perceived to mean that the Fed was not prepared to provide additional support in the near term. Powell’s comments on increasing fiscal stimulus also increased bearish sentiment since the House of Representatives and the Senate have not been able to come to an agreement on the details of an additional stimulus package.

Economic data released last week continues to be historically bad, but results were generally in line with analyst’s expectations. The Consumer Price Index release showed prices fell by 0.8% in the month of April which was the largest monthly drop since the financial crisis of 2008-2009. The report on U.S. Retail Sales for April showed retail sales falling by 16% compared to sales in March. The decline in April was the largest monthly decline on record. For some context, the worst monthly decline in retail sales during the financial crisis was 3.9%.

The price of oil has risen sharply higher over the last few weeks as demand is expected to increase as the global economy restarts. Significant cuts to production by the U.S., OPEC, and Russia have also led to higher prices. The current price of the near-term futures contract for West Texas Intermediate Crude is about $32 per barrel which is quite an improvement from late April when prices briefly dropped below zero. Prices fell below zero because the U.S. was running out of storage capacity, forcing holders of oil futures contracts to pay buyers in order to close out their positions to avoid taking delivery of the oil. The negative price of oil was a short-term anomaly that only lasted one day and was exacerbated by market dynamics on the expiration date of the May futures contract.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. An index is unmanaged and not available for direct investment.

9.  B|O|S Flash Briefing: Week of May 4, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, May 13th, 2020 and today’s flash briefing for the week of May 4th was written by B|O|S Director of Research Jeffrey Blanchard.

U.S. stocks rose for the week ending May 8th despite the release of a historically bad U.S. jobs report released on Friday. The jobs report for the month of April showed a loss of 20.5 million jobs and an unemployment rate of 14.7%. The job losses in April were the highest one-month loss on record and were twice as large as the total number of jobs lost during the entire financial crisis. The leisure and hospitality sector of the economy has been particularly hard hit with employment falling 45% since February. Despite these horrible numbers, the market took solace in the fact that the household survey showed that 18 million job losses were classified as temporary layoffs. Some portion of those temporary losses may become permanent job losses over time but for the time being, investors were encouraged by the high number of temporary layoffs and the concurrent easing of stay-in-place orders across the country.

The first high-profile bankruptcies by large retail chains due to the coronavirus were announced last week as J. Crew and Neiman Marcus both filed for relief. JC Penney has also missed an interest payment but has yet to file for bankruptcy. Defaults on the debt of retailers have now reached an all-time high according to Fitch Ratings. Despite this news, stocks of companies in the retail sector overall have performed well since the lows in late March. The S&P 500 Retailing Industry Index has risen about 33% since March 23rd, which is slightly higher than the return of the S&P 500 Index over the same time period. Troubles for traditional retailers have existed for some time as consumers have embraced online shopping. This has led to a decline in the representative weights of traditional retailers in various stock market indexes which means their most recent stock price declines have had a smaller impact on the overall stock market than would have been the case years ago.

The recent trouble with traditional retailers has raised some concern from investors about the performance of real estate investment trusts, or REITs as they are commonly called. Although there are publicly-traded REITs that invest solely in shopping malls and other forms of retail real estate, these retail-oriented REITs represent only about 8% of the publicly-traded REIT market. Investors who get their REIT exposure through diversified mutual funds or ETFs that track a REIT index have much more exposure to specialty REITS and residential REITs. Specialty REITS are by far the largest sector in the publicly-traded REIT market. The specialty REIT sector includes publicly-traded trusts with diverse businesses such as cell tower leases, storage facilities and data centers. REIT indexes have underperformed the S&P 500 Index for the year but have performed in line with the broader index since the stock market low in late March.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. We also referenced the S&P 500 Retailing Industry Index, which is a market capitalization-weighted index of companies in the S&P 500 that are classified in the retailing industry according to the Global Industry Standard Classification (GICS) system. An index is unmanaged and not available for direct investment.

8.  B|O|S Flash Briefing: Week of April 27, 2020

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Our weekly updates on the markets and economy released most Wednesdays.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. Past performance is not indicative of future results, which may vary. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Flash Briefings, I’m David Newson. Today is Wednesday, May 6th, 2020 and today’s flash briefing for the week of April 27th was written by B|O|S Director of Research Jeffrey Blanchard.

U.S. stocks, as measured by the S&P 500 Index, were relatively flat the week of April 27th as optimism around the reopening of some businesses across the country was offset by worse-than expected earnings reports and rising conflict with China later in the week. Despite the flat performance during the week, the index had its best month since 1987. The S&P 500 Index rose 12.8% in April, largely offsetting its decline in March. Stocks of small companies outperformed the stocks of large companies for both last week and the month as a slowly reopening economy is expected to benefit smaller companies to a greater extent. Stocks of foreign companies outperformed the U.S. last week but underperformed during the month of April.

The Hated Rally

Recent data from the American Association of Individual Investors shows that 44% of their members expect stocks to be lower over the next six months. This level of bearish sentiment is significantly higher than the historical average of about 31%. There is no question that many believe the recent rally makes no sense and fully expect prices to decline as the economic impacts from COVID-19 are fully felt. In general terms, a rally off the lows makes sense when you consider the unprecedented amount of fiscal and monetary stimulus that has been injected into the economy since the market hit the low in late March. No one knows where prices will be later this year, but the market has already priced in bleak expectations for economic data in the second quarter – more on that later. Where prices end up later this year will partially depend on the actual results versus the expectations, which no one can predict with any certainty. That is why we believe the focus should be on your long-term goals instead of a prediction of what may happen over the next few quarters.

U.S. GDP Growth, or a Lack Thereof

The first estimate of first quarter U.S. GDP was announced last week on April 29th. The data showed the economy contracting by 4.8% on an annualized basis after adjusting for inflation. This was the worst quarterly contraction since 2009 and was below the consensus expectation of -4.0%, per Bloomberg. Most of the decline was due to a drop in consumer spending of 7.6%. Ironically, reduced spending on healthcare had a large impact as most people avoided doctors and hospitals if they could and non-essential heath care procedures declined sharply. It is important to note that most stay-in-place orders across the country occurred in mid-March, so the negative impact of the last two weeks of the quarter overshadowed the majority of the quarter when the economy was operating normally. The consensus estimate for second quarter U.S. GDP is a decline of 27.5% with a sharp rebound beginning in the third quarter. That said, the range of expectations is much wider than usual given the unpredictability of the situation.

First Quarter Earnings Update

As of May 1st, 55% of the companies in the S&P 500 Index have announced first quarter earnings. Earnings for the companies in the index are on pace to decline by 13.7% versus the first quarter of 2019. If the decline in earnings holds it will be the largest decline since the financial crisis and is significantly below the expected decline of 6.9%. Given the uncertainties going forward, many companies have withdrawn previously released forward guidance and/or elected not to provide any guidance going forward. Analysts are currently expecting negative earnings growth of 36.7% in the second quarter. All earnings data per Factset.

This Flash Briefing referenced the S&P 500 Index, which is a market capitalization-weighted index that generally contains the 500 largest publicly traded stocks in the U.S., subject to certain restrictions. An index is unmanaged and not available for direct investment.

If you enjoyed today’s briefing please subscribe to the B|O|S Perspectives podcast with your favorite podcast app, your Alexa enabled device or visit bosinvest.com/podcasts. See you next time.

 

7.  The Death of a Loved One: What Do I Do Now?

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“What do I do now?” is often the first question asked when a parent, spouse, child, or a close friend or relative passes away. My best advice is when that time does come, close your eyes, breathe, and take the time you need for your memories. Stay in touch with your own feelings and well-being. Few people can think with total clarity on all fronts when a loved one dies and it is easy to become distracted and endanger yourself or others (falls or other accidents can occur).

The list of important documents to locate may be found at: https://www.bosinvest.com/blog/estate-planning/the-death-of-a-loved-one-what-do-i-do-now/

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today is Monday, April 27th, 2020 and today’s episode is about steps to take after the death of a loved one and was written by B|O|S Estate Planning Advisor, Judith Gordon.

“What do I do now?” is often the first question asked when a parent, spouse, child, or a close friend or relative passes away. My best advice is when that time does come, close your eyes, breathe, and take the time you need for your memories. Stay in touch with your own feelings and well-being. Few people can think with total clarity on all fronts when a loved one dies and it is easy to become distracted and endanger yourself or others. As an example, falls or other accidents can occur.

Other than immediate tasks involving the body of the deceased and pending transactions such as a real estate closing or other financial emergency, most tasks related to someone’s death do not require immediate action. However, for some, focusing on putting a decedent’s affairs in order can provide an opportunity to think about other things and the work may provide emotional relief. For others, focusing on an estate administration can wait until one is emotionally ready to tackle the tasks.

The following information is a checklist of many of the tasks that need to be handled after a person passes away. Ultimately, what needs to be done and how long it will take to deal with each task depends on an individual’s situation. The information set forth below is not a substitute for sound professional advice.

#1. Call 911, family members, and a funeral director

If there is an unexpected death at home, call 911. If the deceased was under hospice care, notify hospice.

Contact immediate family to comfort one another and share information about important decisions. You may encourage them to spread the word so you have more time to attend to other matters.

Look for any written instructions for funeral or memorial services and burial or cremation arrangements. Many people name a designated agent in an Advance Health Care Directive to take care of these arrangements.

Also, look for any records of the deceased person’s desire to donate organs. Two sources to check are the decedent’s driver’s license and their advance health care directive.

Contact a funeral director. An experienced funeral director can help with a variety of services beyond the obvious ones, including making transportation arrangements (if the death was in another city), cremation, notifying government agencies, obituaries, and ordering death certificates.

#2. Secure property

Lock up the person’s home and vehicle and make sure their car is parked in a secure and legal area. If the home will be empty, you may wish to notify a neighbor or the police. If there are pets, arrange for someone to care for the animal until a permanent arrangement can be made.

#3. Funeral or memorial services

Enlist help for the important decisions if needed. Arrange for someone to remain at the decedent’s home during the funeral service. Sadly, many people have come home to find that the deceased home has been robbed while everyone was attending the funeral.

Prepare an obituary and arrange for publication in appropriate newspapers or online. If the deceased left an ethical will or letters written to family members, not legal documents, then share as appropriate.

Notify the post office and provide a forwarding address for mail so that accumulated mail does not draw attention. Mail may also be a source of useful information. Cancel newspaper subscriptions so papers do not stack up.

#4. Ordering Death Certificates

The funeral director or hospice can assist with ordering death certificates. It is usually unclear how many certified death certificates will be needed but 10 to 12 will generally suffice. A copy of a certified death certificate can often be used to accomplish some tasks. If needed, you can always order additional certified copies from the county clerk’s office.

#5. Collect and secure pertinent documents and inspect safe deposit box

Inspect the decedent’s safe deposit box for important documents and valuables. The rules regarding access to a decedent’s safe deposit box can be tricky and may vary from institution to institution. If there is a possibility of disputes among family members, it may be wise to have a bank personnel or disinterested third party present when the box is opened. A written inventory should be prepared at that time to document the contents of the box.

Some important documents to locate are:

Original will and any codicils.
Copies of bank account statements for month including date of death.
Copies of brokerage account statements for month including date of death.
Copies of any securities or stock options that are not included in the brokerage statements.
Copies of any promissory notes receivable and the balance due at date of death.
Copy of the deed to the residence and the deeds to any other real property owned.
Ownership certificates for any automobiles.
Copies of IRA and 401(k) account statements for month including date of death.
Life insurance policies on the decedent’s life or on the surviving spouse’s life.
List of any other assets of any type owned.
Copies of any trusts of which the decedent was a beneficiary.
List of payments made for household bills, etc. for the two months after death.
Mortgage statements for month including date of death.
Real property tax bill for the current tax year.
Names, addresses, and dates of birth of the decedent’s children.
Social security numbers for the surviving spouse and children.
Location of any safe deposit box.
Copies of income tax returns for the last two years.

#6. Consult a lawyer even if you do not engage their services

If at all possible, contact the attorney who prepared the decedent’s will or trust to make certain that you have copies of any documents the attorney had in his or her files. Advice from a qualified professional can often save estate money, make the process of settling the estate easier, and help family members avoid potential liabilities. Even if matters appear straight forward, there are tasks that are required that may not be apparent.

For example, Probate Code Section 8200(a) requires that the person in possession of the will lodge the will with the clerk of the superior court in the county in which the decedent resided within 30 days of learning of the death unless a petition for probate has already been filed. The will must be lodged even if there is not going to be a probate because the decedent had a fully funded trust.

If the decedent had a trust, a Notification By Trustee must be sent to heirs and beneficiaries notifying them of the death and their right to receive a copy of the trust.

You will also want to consider retaining the services of an accountant. There will be final income tax returns to prepare, post-death fiduciary income tax returns, and, depending on the size of the estate and personal circumstances, an estate tax return may also need to be prepared.

#7. Notify government agencies and insurance companies

Typically the funeral director notifies Social Security that a person has died but it is always a good idea to double check. If benefits are being received, overpayments can be complicated. If a payment was received for the month of death, the payment may need to be returned. If the deceased has a surviving spouse or dependents, you will want to inquire about changes to benefits.

If Medicare benefits are involved, Social Security will inform Medicare.

Notify the health insurance company or the deceased’s employer to discontinue coverage.

Terminate other types of insurance, such as automobile or umbrella policies if appropriate and obtain appropriate refund of premiums paid.

#8. Apply for death benefits

It is not much but Social Security provides a surviving spouse a one-time $255 death benefit. Social Security can also put the deceased person on the Social Security Master Death Index to prevent fraudsters from collecting a dead person’s Social Security payments.

Determine the beneficiaries of retirement accounts and take time to understand the best methods to take distributions from these accounts. There are different income tax implications so a thoughtful analysis is important.

Locate any life insurance policies and complete the necessary forms. Each insurance company will have their own requirements for payment of death benefits.

#9. Cancel accounts, memberships, and subscriptions

It may take some detective work but following someone’s death, cancel subscriptions, memberships, or other services that will no longer be used.

#10. Pay recurring bills and terminate automatic payments

Pay regularly recurring bills such as car payments and utility bills. Terminate automatic payments as soon as possible and have paper bills mailed to an appropriate address. As a person’s house is closed down, utilities can be cancelled.

#11. Deal with digital assets

Locate the decedent’s passwords and digital data on computers, tablets, and smart phones and deal with each as appropriate. Digital data will include photos, videos, music, emails, and social media accounts.

Please feel free to contact your B|O|S wealth management team for further assistance in helping you with your loved one’s estate administration.

6.  When the Waiting Isn’t the Hardest Part

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College expenses can be the second largest cost incurred by most families, after the purchase of a home. Since the financial crisis of 2008, states have reduced funding for public universities, requiring students and families to shoulder more of the costs.

Show Notes:

1. Center on Budget and Policy Priorities (CBPP), “State Higher Education Funding Cuts Have Pushed Costs to Students, Worsened Inequality”, October 24, 2019. https://www.cbpp.org/research/state-budget-and-tax/state-higher-education-funding-cuts-have-pushed-costs-to-students

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today is Wednesday, April 22nd, 2020 and today’s episode covers college financial aid and was written by B|O|S Principal, Colleen Supran.

When a new year begins, most high school seniors are both relieved and anxious. While college standardized tests are behind them and applications have been submitted, the waiting seems endless as universities slow roll their admission decisions. Soon families’ focus will shift from the exhilaration of college acceptance to the reality of paying for it. College expenses can be the second largest cost incurred by most families, after the purchase of a home. Paying for college may even delay or derail parents’ retirement plans. Since the financial crisis of 2008, states have reduced funding for public universities, requiring students and families to shoulder more of the costs. According to the Center on Budget and Policy Priorities, tuition has increased 37% on average at four-year public colleges over this period of time. In a handful of states, including California, published tuition is up more than 60%. Net costs including room and board have increased a more modest 24% nationwide in the 10 years following the Great Recession.

Competition is fierce for admission into the highly ranked University of California system, even for in-state applicants. As a result, many California students broaden their search to include out-of-state universities, but attendance to those schools comes at an even greater price. For instance, my daughter is graduating from high school in May and like so many high school students, she submitted applications to an array of universities across the country. As a planner by nature and profession, I, along with my spouse, saved for this since she arrived 17 years ago, feeling joyfully in control as we mapped out projected increases in tuition against savings and appreciation. Once comforted by our advance planning, we were dumbfounded when we learned that the annual tuition cost of college ranges from $45-$65K at competitive out-of-state public universities in states like Wisconsin (Go Badgers!) and Michigan. Private school costs can easily run $20,000 higher.

Even with these bills looming, we dismissed the idea of applying for financial aid. We have some money set aside in a tax-advantaged college savings fund, known as a 529 plan, and regular earned income so we knew that we would not qualify for financial aid based on need. We researched the financial aid process, however, and found that there are some benefits to filing the Free Application for Federal Student Aid, even for families with savings earmarked for college. We completed the Free Application for Federal Student Aid online through the Federal Student Aid office of the U.S. Department of Education. When a family submits the Free Application for Federal Student Aid, the information is provided to the schools chosen by the student on the application.

We learned that many merit-based aid programs offered by schools require the submission of the Free Application for Federal Student Aid for consideration. The reality is that even schools with enormous endowments want to admit mostly students with a demonstrated ability to pay. These schools may offer merit awards to attract the top echelon of students and to fulfill the mission of admitting promising first-generation entrants, but the vast majority of applicants will be asked to pay full tuition. Having a view into the applicant’s ability to pay can also help the university predict who will drop out because of financial hardship. Competitive universities need to maintain exemplary graduation rates, a very important metric for ranking purposes. Could our daughter be given priority by a competitive university because our family demonstrates the ability to pay? Filling out the free application suddenly seemed like a no-brainer.

The Not-So-Secret Free Application for Federal Student Aid Sauce

The key determinants of financial need are an alphabet soup of acronyms:

Cost of Attendance includes tuition, room and board, books, and other expenses such as the cost of a personal computer. This number is calculated by the university and provided to the family on the otherwise glorious day the student is accepted.

Expected Family Contribution is a formula established by law that includes the family’s taxed and untaxed income, assets, and Social Security and unemployment benefits. This calculation also takes into account the number of family members who will attend college during the year. Interestingly, it does not include home equity or retirement plan balances, but annual contributions to retirement plans are included as income.

The difference between Cost of Attendance and Expected Family Contribution is determined to be the family’s financial need. The Free Application for Federal Student Aid is available for filing between October 1 and June 30 prior to the start of the new school year so this calculation is refreshed annually.

The students most in need of aid will qualify for federal grants. The award maximum is $5,135 for the 2020–2021 school year. Universities also have discretion to award additional grant money under the Federal Supplemental Educational Opportunity Grant program. Need-based aid encompasses more than grant money, it also includes a work study job and loans. Borrowing is limited to $57,500 per year for undergraduates, but only half of this amount can be offered as subsidized loans. Subsidized loans are beneficial because the federal government pays the interest expense on these loans for students who are enrolled at least half-time. Any amount borrowed as an unsubsidized loan accrues interest expense from the first day the money is borrowed. If accrued interest isn’t paid, it’s added to the balance of the loan, snowballing the repayment burden. Certain programs also allow parents to take on loans to finance secondary education. Borrowing rates for the federal loan programs ranged from 4.5% to 7.0% for the 2019–2020 school year, but student loans arranged by private lenders can be even more expensive. With increasing costs of attendance, it’s no wonder the Federal Reserve Board reports a crushing $1.6 trillion of outstanding federal student and parent debt as of the first quarter of 2019.

Plan Early, Contribute Often

Unfortunately, there is no clandestine strategy for getting a free or subsidized ride at the student’s college of choice. The available federal grant money is just not enough to cover a big tuition bill and colleges are selective when handing out their own endowment money. With this in mind, the team at B|O|S encourages our clients to fund a 529 plan when children or grandchildren are young. The 529 plan can be used for a broad range of college expenses and balances can be withdrawn with no taxes due on the earnings. While the 529 structure is beneficial from a tax perspective, 529 plan balances will detract from a family’s demonstrated need for financial aid. If parents are the owners of a 529 plan for their child, the plan balance is included in the parent’s assets to determine financial need. If the 529 plan is owned by a grandparent or other family member, the amount used to pay college expenses each year is included as untaxed income to the student in subsequent Free Application for Federal Student Aid filings.

Value Strategies Emerging

Fortunately, strategies for keeping college costs manageable exist. In California, for example, students attending low-cost community colleges have guaranteed admission to a number of University of California schools after successfully completing roughly two years of a full load of classes. While it may not be the right experience for every high school graduate, it does offer an alternative to mitigate rising costs. And, narrowly speaking, the Introduction to Calculus textbook at Diablo Valley College, a community college located in the San Francisco Bay Area, is the same as the Introduction to Calculus textbook at Harvard. Some public universities are also creating honors colleges. These programs offer smaller class sizes and more engaged cohorts at a bargain price. This is an attractive option for those students who are looking for, but unable to afford, a private school experience. With more collaboration and imagination devoted to reducing the high cost of college attendance, someday we may return to a time when the waiting for the acceptance letter was the hardest part.

The author is a 1987 graduate of the University of Wisconsin-Madison. As an in-state resident, she paid $387 for tuition and $1,100 for room and board during her first semester as a freshman.

For important footnotes within the original article, ‘When The Waiting Isn’t the Hardest Part’, please see the show notes for this podcast.

5.  Estate Planning Strategies for Married Couples in the New Decade

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The American Taxpayer Relief Act of 2012 (ATRA) and the 2017 Tax Cuts and Jobs Act (TCJA) implemented sweeping changes to estate planning techniques for married couples.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today is Monday, April 20th, 2020 and today’s episode is about estate planning for married couples in the new decade and was written by B|O|S Estate Planning Advisor, Judith Gordon.

The American Taxpayer Relief Act of 2012 and the 2017 Tax Cuts and Jobs Act implemented sweeping changes to estate planning techniques for married couples. While the American Taxpayer Relief Act of 2012 made permanent the basic exclusion amount, indexed for inflation, of $5 million for an individual for federal estate, gift, and generation-skipping transfer taxes, the 2017 Tax Cuts and Jobs Act doubled the basic exclusion amount from $5 million to $10 million with adjustments for inflation after 2011. The basic exclusion for an individual in 2020 is $11,580,000. However, the 2017 Tax Cuts and Jobs Act also stipulates that the basic exclusion amount will revert to $5 million adjusted for post-2011 inflation after 2025, which equates to approximately $6 million.

The American Taxpayer Relief Act of 2012 also introduced and made permanent the concept of portability — the ability to transfer a deceased spouse’s federal estate and gift tax exemption to the surviving spouse. The applicable exclusion amount for the surviving spouse is the sum of the survivor’s basic exclusion amount and the deceased spouse’s unused basic exclusion amount or DSUE. In order to claim the deceased spouse’s unused basic exclusion amount for gift tax purposes during the surviving spouse’s lifetime or for estate tax purposes when the survivor dies, the surviving spouse must make a portability election on a timely filed estate tax return when the first spouse dies.

For the first half of the new decade — with some basic planning and a portability election — a married couple may be able to transfer approximately $23 million without triggering any federal estate tax for their heirs. Note that a number of states and the District of Columbia have their own estate or inheritance tax. Many states have lower exclusion amounts than the federal government and most of these states have not adopted a portability provision.

Without the threat of federal estate tax liability, achieving a step-up in cost basis for assets owned, in other words eliminating capital gains for income tax purposes, when both the first and second person of a married couple dies has taken on even more importance.

Let’s look at a few couples and how they might structure their estate plan heading into the new decade.

The first example we’ll look at is Joe and Amanda.

Joe and Amanda have a combined net worth of approximately $10 million, which is less than one basic exclusion amount. In deciding how their assets should pass to the survivor upon the first spouse’s death, they may consider making an outright transfer to the surviving spouse or making a transfer to a trust for the benefit of the surviving spouse. In this scenario, transfer taxes are not the driving factor but avoiding additional capital gains taxes for family members are of concern.

If Joe and Amanda favor simplicity and are comfortable with the surviving spouse having control over all of their wealth, an outright gift to the spouse may work best to achieve a step-up in basis of the assets at both first and second death.

However, Joe and Amanda might choose to use a trust for the benefit of the surviving spouse for reasons that include a desire of the first spouse to die to control the disposition of his/her share of the assets after the surviving spouse dies, providing for a trustee or co-trustee to help the surviving spouse manage the assets, and reducing the exposure of the assets to creditors.

For Joe and Amanda, income tax planning should take precedence over estate tax planning and getting a step-up in basis on assets at first death and second death should take priority. If the transfers are made to a trust for the benefit of the surviving spouse, the trust should be structured as the type of trust in which assets are included in the survivor’s estate and get an additional step-up in basis upon the second spouse’s death.

Regardless of whether an outright gift or transfer in trust for a spouse is made, at first death, the survivor should consider a portability election because it is possible that in the future the basic exclusion amount could be reduced, or the estate of the survivor could grow above the one basic exclusion.

Now let’s look at the example of Dan and Fred.

Dan and Fred have a combined net worth of approximately $15 million, which is more than one basic exclusion amount but less than two basic exclusion amounts. Dan and Fred will need to do some planning to ensure that their heirs do not pay estate tax when the second spouse dies. They may consider making an outright transfer of assets to the surviving spouse with the expectation that the surviving spouse will make a portability election or making a transfer to a bypass trust for the benefit of the surviving spouse.

Before portability became an option, the use of a bypass trust was a standard feature in many couples’ estate plan. With a bypass trust, a surviving spouse can have lifetime access to the income and to the principal of the trust for health, maintenance, support, and education. At the survivor’s death, the value of the bypass trust including all appreciation is not included in the survivor’s estate for estate tax purposes. However, the assets in the bypass trust do not receive a step-up in basis when the survivor dies. If there is a substantial age difference between Dan and Fred and/or assets owned by the surviving spouse are expected to appreciate substantially before the surviving spouse’s death, Dan and Fred may strongly consider using a bypass trust.

On the other hand, if Dan and Fred do not expect their net worth to grow significantly and are comfortable with the surviving spouse having control over all their wealth, an outright gift to the spouse with a portability election may be preferable. Or, just like Amanda and Joe, they could choose to use a trust for the benefit of the surviving spouse, in which the assets are included in the survivor’s estate and get a step-up in basis at second death.

Finally, let’s look at the example of Harry and Helen.

Harry and Helen have a net worth of $60 million. Their estate planning world has not changed. Pre- American Taxpayer Relief Act of 2012 and pre- 2017 Tax Cuts and Jobs Act estate planning strategies are still very appropriate, but they should also consider more advanced estate planning techniques to minimize the amount of estate tax due, such as grantor retained annuity trusts, qualified personal residence trusts, and sales to intentionally defective trusts.

In summary, estate plans are meant to be reviewed approximately every five years or when changes in tax laws occur. Focusing attention on current tax laws and tax-saving strategies and knowing that additional changes can be made when appropriate is generally a winning estate planning strategy.

Please contact your B|O|S wealth management team, estate planning attorney, or accountant to discuss these strategies in more detail.

4.  Estate Planning in the Time of COVID-19

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The escalating COVID-19 pandemic has many of us thinking about the health and wellness of our families. While many individuals may have a basic estate plan in place, that estate plan may need updates or revisions. For others who do not have legal estate documents, now is a good time to focus on getting documents prepared. In addition, for those who are interested, challenging times create some unique opportunities in wealth transfer planning.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today is Wednesday, April 15th, 2020 and today’s episode is about estate planning in the time of COVID-19 and was written by B|O|S Estate Planning Advisor, Judith Gordon.

The escalating COVID-19 pandemic has many of us thinking about the health and wellness of our families. While many individuals may have a basic estate plan in place, that estate plan may need updates or revisions. For others who do not have legal estate documents, now is a good time to focus on getting documents prepared. In addition, for those who are interested, challenging times create some unique opportunities in wealth transfer planning.

The following are some estate planning topics upon which to focus:

Topic #1 – Review Basic Estate Planning Documents

Review current estate plans to ensure that the basic documents such as wills, revocable trusts, durable powers of attorney, advanced healthcare directives, and beneficiary designations are in order and reflect your current wishes.

Assess your choices for who will act on your behalf if you are unable to manage your healthcare or your financial affairs in the event you become incapacitated or pass away and who will care for minor children. If appropriate, reevaluate the individuals and charities you’ve chosen to inherit your assets and how those inheritances have been structured.

If the documents need revisions, focus on your current wishes and remember that documents can be changed in the future. Put your documents in a safe place and let someone know where the documents are located.

Topic #2 – Track Personal, Financial, and Other Important Data

Track personal, financial, and other important data in one place. Having all of the information that a family member or other designated person will need readily available in the event of incapacity or death will be greatly appreciated. There are a variety of ways to assemble your personal and financial information including checklists, spreadsheets, or preprinted forms.

Topic #3 – Explore Wealth Transfer Strategies

Lower estate and gift tax exemptions are currently scheduled to become effective in 2026. It is also possible that the November election may bring a change in administration and a change in the gift and estate tax laws.

Some of the most successful estate plans I have helped orchestrate came out of estate planning and wealth transfer strategies undertaken during the 2008 financial crisis. Currently, lower financial markets, depressed asset values, and low interest rates present significant opportunities to transfer wealth to intended beneficiaries.

The following are some wealth transfer techniques to consider:

Technique #1 – Tax-Free and Taxable Gifting

Dips in the market trigger lifetime gifting opportunities. The annual tax-free gift exclusion of $15,000 per person per year does not count against one’s lifetime gift tax exclusion. Since the amount of the gift is measured at its current fair market value, gifting marketable securities now when valuations are down offers some extra mileage, because – BUT THOSE those gifts will offer greater value to recipients as valuations recover in the future.

The same philosophy holds true for larger taxable gifts. Gifts of assets with lower valuations will allow a greater amount of one’s lifetime exemption to remain available to offset estate taxes at death. Given the likelihood that the current high estate and gift exemptions will revert to lower amounts in 2026, and with a current estate tax rate of 40%, maximizing the estate tax exemption will be of utmost importance.

Technique #2 – Grantor Retained Annuity Trusts, which are also referred to as GRATS

Grantor Retained Annuity Trusts are financial vehicles used to leverage the gift tax exclusion amount. GRATS are often structured to use very little, if any, of the gift tax exclusion and are typically designed to transfer excess investment return without additional gift tax. GRATS are generally more powerful in a low interest rate environment.

In a GRAT, the grantor transfers assets to an irrevocable trust and retains an annuity payment for a certain term of years. The retained interest reduces the value of the remainder gift to the beneficiaries who are typically family members. To the extent that the assets inside the GRAT appreciate at a rate in excess of the interest rate used to calculate the value of the remainder at the time of the gift, the excess appreciation is transferred tax-free to the remainder beneficiaries. The applicable rate, known as the IRC section 7520 rate, in April 2020 is 1.2%, compared to 3.0% in April 2019, making GRATs particularly effective at this time.

For existing GRATS that may have declined significantly in value, there is generally an opportunity to swap out the assets in the GRAT and restart the GRAT from a lower funding value.

Technique #3 – Intra-Family Transactions

There are a few options in this category.

Transaction type #1 – New Intra-Family Loans or Refinancing Existing Loans

If family members are in need of funds, a loan may be a good way to help them. Intra-family loans can be made at below-market interest rates provided each month by the IRS. For April 2020, the rates are just 0.91% for loans of three years or less, 0.99% for loans of more than three years but less than nine years, and 1.44% for loans of more than nine years.

If done properly, existing loans at higher interest rates can also be refinanced at the lower rates. Loan documents must be properly drafted and the interest on the loan is taxable to the lender.

Transaction type #2 – Sales to Grantor Trusts

A grantor trust is a trust deemed to be owned by the grantor so that any sales of assets by the grantor to the trust are not subject to income tax. The transaction is deemed a sale by oneself to oneself. For example, parents can sell assets to a grantor trust for a child without triggering a recognition of gain. The sale can be for a promissory note, with interest payable at the minimum rates required by the below-market loan rules. To avoid an argument by the IRS that the trust is not a creditworthy borrower, it is generally recommended that a taxable gift of about 10% of the value of the asset to be purchased be contributed to the trust upon formation. The remainder of the sales price covered by the promissory note does not use additional gift tax exemption.

The sales price of the asset is determined by an appraisal and the grantor continues to pay the income taxes on the income generated in the trust. The payment of income taxes is also not deemed an additional gift. The value of the asset included in the grantor’s estate for estate tax purposes is the remaining balance owed on the promissory note and not the value of the asset held by the trust.

With current lower valuations and lower interest rates, this technique has the potential of unprecedented wealth transfer.

Transaction type #3 – Roth Conversions

Owners of traditional IRAs will likely be looking at higher income tax rates applied to both principal and growth when withdrawals from the IRAs are made in the future. On the other hand, distributions from a Roth IRA account are free of income tax.

Given that most IRA values are currently lower than they were a few months ago, making a Roth conversion and opting to pay the tax bill now, will allow the future recovery growth to go untaxed.

Roth IRAs are also not subject to required minimum distribution rules. Further, the recently passed Secure Act eliminated stretch IRAs for most beneficiaries. Instead, most IRAs inherited by non-spouses must be fully distributed within 10 years from the owner’s date of death. Converting a traditional IRA to a Roth IRA at this time will also help heirs avoid higher taxes down the road.

Transaction type #4 – Charitable Lead Annuity Trusts, which are also referred to as CLATs

In a CLAT, the grantor transfers specific assets to a trust in which a charity receives an annuity stream for a certain term of years, and at the termination of the trust, any remaining assets pass to the remainder beneficiaries.

The value of the annuity passing to the charity is affected by the IRC section 7520 rate. A lower 7520 rate means a higher present value of the annuity passing to the charity and a lower current value of the assets expected to pass to the remainder beneficiaries. For gift tax purposes, the taxable gift is the actuarial amount expected to pass to the remainder beneficiaries. Similar to the other strategies discussed here, using this technique when asset values are depressed and interest rates are lower may result in more assets passing to beneficiaries.

Now Is the Time to Plan

With additional flexibility in current work and life schedules and perhaps the time to focus on other things, now is a good time to reach out to your current estate planning attorney or interview a new one and move estate planning up a few notches on your to-do list. Attorneys are working from home and most have the ability to meet with clients over the phone or the internet.

If you are interested in learning more about any of the techniques addressed above, please contact your B|O|S wealth management team to review your financial situation.

3.  Q1 2020 Quarterly Summary

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The first quarter of 2020 was one for the history books. Over the course of three months, the coronavirus known as COVID-19 transformed from a strange new virus in a faraway place to an imminent and deadly threat within our communities. The impact of the virus has been tragic for many.

Show notes:

The full Quarterly Summary, with important disclosures, is available on the B|O|S website here.

TRANSCRIPT:

The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice or be used to evaluate any investment or security and does not constitute a solicitation to enter into an investment agreement with B|O|S. For more details, please see bosinvest.com/disclosures.

Hi and welcome to B|O|S Perspectives podcast, I’m David Newson. Today is Tuesday, April 14th, 2020 and today’s episode covers a review of securities markets for the first quarter and was written by B|O|S Chief Investment Officer, Rich Golinski.

The first quarter of 2020 was one for the history books. Over the course of three months, the coronavirus known as COVID-19 transformed from a strange new virus in a faraway place to an imminent and deadly threat within our communities. The impact of the virus has been tragic for many.

In addition to the human toll, the economic fallout from the coronavirus has been severe as social distancing measures have essentially shut down substantial segments of the economy, forcing many businesses to close and lay off employees. In response to the economic shock, the U.S. government passed the largest fiscal stimulus package ever in March. The CARES Act earmarked $2 trillion to help large companies, small businesses and individuals navigate the economic strains. The Federal Reserve also took extraordinary measures, lowering short-term interest rates back down to 0%, backstopping money market funds, resuming its previous quantitative easing program and expanding QE to include both corporate and municipal bonds.

Stock markets around the world declined sharply in response to the economic turmoil and expectations that the virus will trigger a global recession. U.S. stocks, as measured by the S&P 500, registered their worst quarter since the fourth quarter of 2008, according to Morningstar, declining 19.6%. The S&P 500 previously returned negative 21.95% during the 4th quarter of 2008. Additionally, the MSCI ACWI ex US Index (a broad index of developed and emerging country foreign stocks) declined 23.4% during Q1.

While all stock sectors in the U.S. registered losses in the first quarter, large-company technology stocks generally held up better than other market sectors. A handful of technology stocks even generated gains for the quarter as demand for their services increased – Zoom Communications, a videoconferencing company, saw its stock more than double as businesses scrambled to transition to virtual meetings. On the other end – HAND- of the stock spectrum, value stocks and small company stocks lagged the overall stock market during the quarter. Relative performance of these stock sectors contrasted with 2008, the worst year of the previous bear market. In that year, according to Morningstar, both value and small company stocks modestly outperformed the broad market while technology stocks were one of the worst-performing sectors. Specifically, calendar year returns for 2008 were as follows: the S&P 500 returned negative 37%, the Russell 1000 Value Index returned negative 36.85%, the Russell 2000 Index returned negative 33.79%, while the S&P 500 Information Technology Sector Index returned negative 43.14%, the third worst of 10 sectors.

High-quality bonds held their value during the quarter as the yield on the 10-year Treasury note declined to all-time lows. The bond portfolios we recommend for our clients generated flat to slightly positive returns, helping to moderate the impact of stock losses on portfolio values. Our focus on the high-quality end of the bond spectrum helped as lower quality, or junk bonds, returned negative 12.68% during the quarter, according to Morningstar.

Looking across our clients’ portfolios, the variation in returns was largely a function of the amount allocated to stocks – portfolios with higher stock allocations incurred larger losses while those with lower stock allocations registered smaller losses.

With the lack of any useful historical precedent and in the face of great uncertainty, forecasters’ estimates of the coronavirus’s impact on the economy and the stock market vary widely. The range of potential outcomes is wider than at any time since at least the financial crisis of 2008-2009.

As of April 9th, the U.S. stock market has rebounded off its low in March although it is still well below its high in February. Over the past week or so, some investment commentators have been encouraging investors to buy stocks at these lower levels. For example, a recent Wall Street Journal article titled, “It’s a Good Time to Stock Up” written by Burton Malkiel, author of A Random Walk Down Wall Street, makes this point.

In his article, Malkiel outlines some good reasons to buy stocks at the present time. For one, the sharp decline has caused investors’ stock allocations to drop below their long-term targets and one way to get back to these long-term targets is to rebalance portfolios by selling bonds and buying stocks. Moreover, given that prices are down, investors buying at current levels should expect higher long-term returns relative to the returns implied by stock prices a couple of months ago. Additionally, stocks tend to rise swiftly coming out of bear markets so a disciplined strategy of averaging-in ensures that investors captures at least some of these gains with their new purchases.

In our view, Malkiel’s advice is appropriate for some investors but not appropriate for others. The key determining factor is the investor’s ability and willingness to withstand additional stock market declines. A simple way to frame this issue is to consider how you would handle an additional 50% decline in stocks from current levels. While we don’t believe a further 50% decline in stocks is likely, it is certainly possible – a loss of this magnitude would result in a cumulative decline from the February high of about 60%, which would approximate the U.S. stock market decline during the financial crisis of 2008 -09.

If an additional 50% stock decline is unlikely to affect your investment approach or to force you to substantially change your spending plans, buying stocks at this time via an averaging-in strategy could well make sense for you. In general, investors in this category tend to have longer time horizons, the ability to tap other assets for spending needs, and the ability to emotionally accept significant investment losses.

On the other hand, if there is even a modest risk that a further substantial stock market decline causes you to abandon your long-term investment strategy or forces you to give up on financial goals you value, you would likely do well to focus more on limiting your downside risk rather than positioning yourself to capture more of the upside. At a lower equity allocation, any subsequent declines in stocks will have less of an impact on your portfolio’s value than if you had bought more stocks.

Ultimately, whether an investor should buy stocks at this time is highly dependent on each investor’s unique circumstances. What makes good sense for one investor may be inadvisable for another. In our role as advisors to our clients, we put a great deal of emphasis on understanding each client’s broader financial picture including their long-term objectives and preferences. With an understanding of the broader picture, we are well-positioned to help our clients make important financial decisions such as whether to buy stocks in a way that fits with their most important goals.

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